15 December 2016

ESBG: New leasing standard presents big challenge for banks

ESBG warned in its response to the EFRAG consultation on the accounting standard that leasing products provided by savings and retail banks would be jeopardized under the new proposed IFRS16 on leases.

In advance of responding to the questions posed in the consultation, ESBG would like to draw EFRAG's attention to a number of points that have sparked discussion and concern amongst ESBG´s membership:

• Given the business model implemented by financial institutions, and in particular the standard strategy they employ to facilitate clients (combination of branches, mobiles and internet) lease arrangements are often necessary. At times leasing may be the only option available, even though the lessee has adequate funding to purchase, the owner of the property is unwilling to sell and they have no choice but to enter into a lease agreement.
• While it is accepted that the more comprehensive information on the lessee side will provide an improved overall picture of the entity, increasing investor protection and market confidence, whether or not the endorsement of IFRS 16 strikes an appropriate balance between costs and benefits for the banking industry remains uncertain, as the significant benefits from the application of the standard are not obvious to many of our members.
• Compliance with the new standard will lead to significant one-off and on-going costs, bearing in mind that no difference is expected in terms of total impact on equity of lease contracts under IFRS 16 compared to existing IAS 17, except for timing recognition.
• This accounting change should not lead to a reassessment of entity's overall risk profile, and in particular no negative prudential impact should arise from adopting IFRS 16. 
  The current uncertainty regarding the prudential impact of right-of-use assets makes it difficult for preparers to decide on the transition approach.
• Members are concerned about the impacts of adopting IFRS 16 in activity levels of lessors; in particular if companies within the scope of the new requirements are different across Europe based on how IFRS 16 is adopted into local accounting frameworks.

Full response

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